This past summer, various parts of the world were plagued by several natural disasters: wildfires in Canada, drought in Southern Europe, and deadly floods in Libya. Lucas Wouters, Climate Data Specialist at APG, discusses whether these weather extremes have been factored into investments and what happens if the 1.5-degree temperature increase threshold is exceeded in the coming decade.
• The rise in global temperature is progressing as expected. This upward trend implies an increased likelihood of natural disasters in some regions.
• The escalating climate risks in specific areas can impact the willingness to invest there.
• AI is one of the factors contributing to the improvement in the quality and quantity of climate data.
“The current rise in temperature aligns with climate models,” Wouters explains. “They appear to be quite accurate. However, this also means there is unfortunately an upward trend, indicating an increased likelihood of natural disasters in certain regions.” The extreme weather events of last summer may have been caused by climate change, but it’s also possible that other factors played a role. “One example is El Niño, the natural phenomenon indicating warming in the eastern part of the Pacific Ocean along the equator.”
Scientists anticipate that the critical 1.5-degree warming threshold will be surpassed in the next decade. So are the consequences of climate change irreversible or does that occur only with a 2-degree warming, as is also suggested?
“Although 1.5 degrees is not strictly considered an irreversible critical threshold, we prefer to stay below it, as agreed upon in the Paris Climate Agreement. Even minor increases can have significant impacts on ecosystems and societies. If the current trend continues, we could reach a temperature increase of around 3 degrees or higher by the end of this century. Identifying tipping points is challenging, as they vary from process to process. Some forests are already experiencing tree mortality due to climate change, and coral reefs are bleaching in various parts of the world, even though we’re still below the 1.5-degree temperature increase. These are processes that are difficult to reverse. Coral bleaching is one thing, but changes in ocean currents due to global warming can have far greater consequences. This isn't just about the impact on fish populations but also about the possibility that Europe will no longer benefit from a warm Gulf Stream, resulting in a completely different climate here. However, this scenario comes with many uncertainties, making precise predictions extremely difficult. The focus is on doing everything possible to limit the temperature increase.”
Can atypical weather patterns or natural disasters always be ‘attributed’ to climate change or, conversely, to El Niño?
“Identifying the exact cause of a natural disaster is challenging, partly because we still don't fully understand El Niño. This is also true for other forms of natural climate fluctuations influencing extreme weather events. We do know that the likelihood of certain natural disasters is now greater than before the industrial revolution. El Niño may further increase this likelihood. The fact that the temperature increase is within the expected range does not necessarily mean that the same is true of the consequences. The physical and socio-economic consequences of global warming appear larger than expected, and the adaptive measures taken so far are inadequate. One factor is the difficulty in predicting the influence of temperature increase on floods and the impact of floods on a society. The latter is for example related to a country's construction policy. These are consequences we want to know about because they are relevant to our investments. Therefore, we are taking further steps to combine climate and asset data to minimize climate risk for investments. We calculate multiple scenarios, considering temperature increase and the level of human adaptation.”
It’s important to know the climate risks of an area and how they’re being addressed
Your work involves analyzing various types of climate data. Is the reliability of this data increasing?
“For such analyses, we use, among other sources, reports and consolidated data from the IPCC, the UN climate panel. It aggregates all global research on climate change and summarizes it in one publication. Each new report contains new, refined data and projections, providing an increasingly better understanding of climate risks for different regions. Each new report also includes more models than the previous one, improving our ability to predict. The IPCC reports follow each other at intervals of about five to eight years, but there are also interim reports and other sources of climate data that regularly provide new information. However, we don’t get new data on a weekly or monthly basis, and our models aren’t updated with that frequency. Still, with each new report or study, there is the possibility of new discoveries that could impact on our portfolio.
Not only is the reliability of data increasing, but so is the quantity. There are more companies focusing on developing tools for climate data and analysis. They claim to have datasets covering all business assets worldwide. This includes spatial data on everything visible on a map, such as pipelines, ports, and real estate. By linking them to climate data, you can assess the vulnerability of such an asset. AI also plays a role in the increase in the quality and quantity of data. For example, you can use AI to teach a satellite data tool to recognize a house. Once you teach the tool this a few times, it can automatically identify houses or other buildings.”
Some regions will be more severely affected by climate change than others. In general, developing countries, particularly in Africa and Asia, face the highest risks. Are such regions still attractive for investment?
“It depends. It is theoretically possible that some regions or countries in Africa may benefit from climate change. Extreme weather events are often detrimental, but some climate zones might shift, providing certain areas with a more favorable temperature or precipitation pattern for agriculture. However, it’s crucial to note that the negative consequences of climate change generally outweigh the potential benefits. Some countries, for example, may experience more flooding, requiring us to carefully evaluate an investment decision based on local risks. What matters is what countries do to limit climate risk. Both the Netherlands and Bangladesh are partially located in delta areas. Due to the construction of dikes and water defenses, we have a lower risk of flooding here. In Bangladesh, the necessary infrastructure is currently lacking, although they are taking steps to improve it. Therefore, it’s important to know the climate risks of an area and how they’re being addressed. However, increasing risks in certain regions may influence investment willingness.”
The lack of global consensus on climate policy is considered a significant obstacle by 53 percent of investors on the path to a net-zero world. Later this year, there will be a climate summit in Dubai. Do you expect the existing climate goals to be further tightened there?
“The natural disasters this summer could serve as a catalyst to stepping up efforts. This is particularly true because the consequences of climate change, with or without El Niño, have become so tangible. But not all countries are on the same page. Hopefully, developed economies can reach an agreement with developing economies, which are generally the most vulnerable to climate change, and set ambitious climate goals together.”
Besides consensus, what else is needed?
“The international community must invest in countries that may have a slightly higher risk profile, but where the most significant growth will occur in the coming years. This is to increase resilience against climate change and achieve climate goals. Currently, China is one of the largest investors in green energy and is making more significant strides than the E.U. or the U.S. Then there's India: that economy will likely continue to show high growth rates in the coming years, which also has implications for that country's already large (absolute) CO2 emissions. Ideally, international cooperation will ensure that India, as well as other countries, will grow economically while simultaneously reducing global CO2 emissions.”